I am looking forward to hearing what the EFRA Select Committee has to say on the Water White Paper. In my evidence to the Select Committee, I sought to differentiate between Government mandating that each and every water company legally separate its retail activities and allowing for a company that was minded to separate to be able to do so.
At one level, I am optimistic that a company should be able to separate its retail activities - simply because I am aware that Bristol Water and Wessex Water were able to establish BWBSL, a joint billing and customer service company. However, there is an important principle at stake: companies should not be required to continue to operate in a competitive market if it turns out that it would be more advantageous for both their customers and their shareholders for them to exit the retail market.
In many ways, just as it was important that Government should not mandate separation and impinge unnecessarily on property rights, it should avoid dictating who must participate in the retail market. If it does not allow for divestment of retail operations, there is a risk- a not insignificant risk- that the bills of non-contestable customers could be adversely affected.
One final thought about the workshops that we arranged with Water UK - I do hope I may have dispelled the myth that legislation is on the critical path to a market opening.
There are many other activities which will need to be got right, both before and after the next price determination, if a retail market is to be opened by April 2017.
As a regulator, it is all too easy to overlook some of the challenges that are faced by the regulated company in responding to a new framework. For me, one of the most interesting features of our recent workshops held at Water UK was the insight that Scottish Water gave about changes that it had to make to its wholesale activity.
Our focus, I think rightly, had been on ensuring that the split between wholesale and retail activities was clear and that costs were allocated accurately. We were also quite focused on ensuring that there was a level playing field and that there could be no question that the Scottish Water retail subsidiary could enjoy any advantage relative to the new licensed providers.
It was therefore clear to us that the retail activity of Scottish Water would have to change substantially as a result of the introduction of retail competition.
Scottish Water made, in my view, a most telling observation: the rump of the vertically integrated company (what we called, perhaps rather too easily, the wholesale business) needed to change dramatically too. It now had demanding, informed customers who were very aware of the service levels set out in the Operations Code and the Wholesale Services Agreement. This required some business processes to be changed and some new ones to be introduced.
Perhaps the most important conclusion is that market design and planning will only take you so far: implementation is key.